P2P lending machine fires up on all cylinders amid slow bank loan disbursements
P2P lending involves lending money to individuals through an online platform that connects lenders with borrowers. This mode is useful for both lenders and borrowers because the former can earn a higher interest rate (than bank savings account or many other debt instruments) and the latter can obtain funds (loans unsecured) at lower rates than banks or non-bank financial companies (NBFCs). India has nearly 20 P2P lenders, with a combined outstanding loan portfolio of around ₹5,000 crore. These entities are regulated by the RBI.
“We are disbursing almost ₹130 crore in loans every month. In the last year, we have increased 30 times,” said Rajat Gandhi, founder and CEO of Faircent, which claims to have a loan book of worth ₹2,000 crore. “Our volumes have soared after rolling out a series of new products for lenders and borrowers. At the portfolio level, we are able to deliver returns of 12-15%, after adjusting for expenses and defaults,” he adds.
The bulk of lenders filling the lists of major P2P platforms are yield-hungry retail investors and merchants with excess cash flow. Several high net worth individuals and family offices write large checks in favor of borrowers on these platforms. They are incentivized to lend on platforms because their traditional fixed-income investments – such as bank term deposits, savings accounts, debt funds, debentures and corporate FDs – earn 3-7% on an annual basis.
Diversified investment portfolio
“Apart from P2P lending, no asset class is generating 14-16% annual returns in the current scenario,” said V Shankar, Founder-CEO of I-lend, a P2P platform that plans to restart its operations after the termination of the loan. disbursements last year when the first wave of Covid-19 hit the country. “We have lenders asking us to resume operations. There is a lot of interest now. With macro factors looking good and people having enough savings from working from home, there is more willingness to lend to higher interest rate.”
For lenders (investors), lending on a P2P platform is a way to further diversify their investment portfolios. Often they divert their stock market gains or monthly surpluses to generate higher returns. Many financial advisers and wealth managers also advise their clients to lend on P2P platforms, but they do not recommend more than 10% exposure (of the total investment portfolio) to this asset class.
Borrowers are flocking to P2P lenders because most banks and NBFCs have been slow to extend personal loans to customers with relatively lower credit scores. Additionally, several fintech and digital lenders (especially those providing short-term payday loans) were forced out of business by law enforcement a few months ago for engaging in contrary collection methods. ethics in collecting loans. This forced borrowers to exploit the peer-to-peer network to obtain funds. The loan ticket size of most P2P lenders ranges between ₹50,000 and ₹70,000 – often granted for a period of 12 months. These loans are disbursed at interest rates of 10-18%, depending on the borrower’s credit profile.
“The quality of borrowers has improved because we also have a lot of bank/NBFC customers these days. There is a lot of credit awareness now,” said Bhavin Patel, Founder and CEO of LenDen Club, which currently has a loan. book worth ₹700 crore. “Even new customers are aware of the different lending products. This has helped the P2P business grow significantly over the past three years. Compared to pre-Covid levels, we are now transacting 12-15 times more,” he adds.